Whitepaper on improving the transparency and regulation in Delhi’s Realty market

As a leading stakeholder of the National Capital Territories’ property market, at India Sotheby’s International Realty (ISIR), have put together a white paper with recommendations on improving the transparency and regulation in Delhi’s Realty market

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Whitepaper on improving the transparency and regulation in Delhi’s Realty market

The National Capital of Delhi, a union territory with an elected government enjoys a special status. It’s the capital city of India and a prosperous one at that, with Delhi’s per capita income the second highest in India. The per capita income of Delhi during 2020-21 is estimated at Rs. 3,54,004 against a national per capita income of Rs. 1,27,768, according to data presented in Delhi’s economic survey. Thus Delhi’s per capita is almost three times of the national average. The total purchasing power of Delhiites has grown by 37% in the last ten years, making it one of the top economic hubs of the country.

With rising economic wellbeing, come rising aspirations. It’s a dream come true for almost everyone living in Delhi, to own a home. Delhi government’s revenues earned from stamp duty and registration fee have been consistently rising and despite the pandemic, Delhi’s real estate market witnessed robust transactions. Stamp duty and registration fee revenues have gone up from INR 4606 crore in 2019-20 to INR 5297 crore in 2020-2021, according to the budget presented by Delhi Government.

Despite the robustness in revenues and transactions, the on-ground situation of Delhi’s real estate re-mains worrisome at some fronts. Real Estate Regulation Act or RERA has failed to adequately protect Delhi home buyers. According to a report aggregated by an independent property consultant, the total number of projects registered under various state RERAs nationwide as of November 2021, were 71,307 projects. In Delhi RERA however, only 32 projects were registered. This number of RERA registered projects in Delhi is not only amongst the lowest in any Union Territory, it also falls dismally short when compared with RERA registered projects of cities like Mumbai and Bengaluru.

This white paper analyses the leading gaps and areas of non-regulation in Delhi’s real estate market. It highlights the prime causes which allow builders in the national capital territory to escape RERA reg-istration. It also presents concise and useful recommendations for changes to be brought about, through an executive or legislative fiat or legal amendments to the RERA Act itself, for better protection of Delhi’s home buyers.

TOP AREAS OF CONCERN

GENERAL POWER OF ATTORNEY (GPAs) & DEAL STRUCTURE OF BUILDER FLOORS

Most of Delhi’s real estate is a redevelopment market where older homes of single or two floors are converted into 4 floors as allowed by the latest FSI norms. The homeowner, many times a senior citizen, ends up collaborating with a builder to retain a few floors and the rest are acquired by the builder for sale, with a promise of constructing the entire 4 floors to a certain standard and specification. Mutually decided upon by the homeowner and the builder. The biggest gap lies in this transaction.

The builder structures the transaction which offers no protection to the original home/ landowner. These transactions are done via a General Power of Attorney with an intention to take full control of the property including selling rights, leaving the original owner with absolutely no rights. In such sale of builder floors in Delhi at early stages, the builder further sells unconstructed floors to new sellers and takes large advances mis-using the GPA, as high as 85% of the floor value. This structure exposes both the original owner of the home and the new home buyer to an extremely high level of risk. They both remain at the builder’s mercy till the project is completed as promised. In case of any delay, siphoning of money by the builder, or a delinquency, the entire risk rests with the two categories of homeowners, as outlined before. The maximum number of delayed projects and complaints on non-completion of homes in the national capital fall within this complicated one-sided builder- buyer agreements through GPAs.

More importantly, GPA transactions are undertaken to largely avoid payment of stamp duty and GST to the state. This is a huge revenue loss to the Delhi government and needs to be curbed at the earliest.

2. CURRENT RERA RULES NOT IDEAL FOR DELHI’S REAL ESTATE MARKET

Current RERA rules provide exemption for any development of up to 500 square meter and less than 8 apartments to register with Delhi RERA. Undoubtedly this is a grey area. A few judgments of RERA Authorities and Appellate Tribunal in states other than Delhi, have interpreted this as more than 500 square meters OR 8 units. While this gray area as opined by experts, is the biggest gap in DELHI RERA Act, there is also lack of inclination amongst developers to come forward for RERA registration. For instance, if a developer is building on a plot more than 500 sqm, he still finds ways and means of evading a RERA registration by ensuring that the number of units are less than 5.

This is further compounded by the fact that banks and financial institutions approve loans to home buyers on non-RERA registered floors, without adequate scrutiny. This gives the home buyers a false sense of comfort.

This loophole in the act also allows agents or brokers in Delhi to largely escape any RERA registra-tion. A vicious cycle is created wherein unregistered projects attract unregistered agents. Since RERA registration of agents is required only for RERA registered projects there is a policy change required here.

3. NON-AVAILABILITY OF PROPERTY TITLE ON GOVT BACKED ONLINE PORTALS

Given the lack of online data on title, buyers are often trapped into disputed properties. They have no way of verifying the legalities of the floors on offer from the builder, who dupe them by saying, the transaction is above board and with clear title.

4. STAMP DUTY EVASION

The very fact that cash in the Indian economy has doubled from INR 16 lakh crores to about INR 29 lakh crores post demonetization indicates that real estate transactions are being closed at much lower values than the actual transaction price, particularly in the Farmhouses area and Category B and lower colonies. This again results in massive loss of government revenues from registration, stamp duty and income tax on capital gain.

5. CIRCLE RATE DISCONNECT WITH ACTUAL MARKET PRICES

Property must be registered on either the actual transaction value or the circle rate, whichever is higher. In New Delhi, the stamp duty that needs to be paid is 7% of the consideration amount of the circle rate, if the property is registered in a man’s name and 5% if it is registered in a woman’s name. A 20 per cent rate cut in circle rates announced by Delhi Government for a limited period till December 2021, had brought about a one percent reduction in stamp duty. This benefits all real estate transactions across Delhi state. However, we believe, the actual benefit occurs only when the transaction price is a little lower than circle rate, as this keeps the transactions in the market most buoyant, helping government earn the highest revenues.

The bigger need of the hour, therefore, is on rationalisation circle rates across different categories of Delhi’s property market, since Delhi is divided into eight categories depending on how upscale the location is.

In category A localities like Maharani Bagh, New Friends Colony, Panchsheel Park, Vasant Vihar and Hanuman Road, the market rates are significantly below circle rates, particularly for large size plots despite the 20 per cent cut. This leads to a deadlock on transactions.

And in category B micro markets like Defence Colony, Anand Lok, Neeti Bagh, Greater Kailash, to name a few, the actual market rates are much above circle rates leaving room for cash transactions.

Such irrational thresholds need to be fixed in a citywide exercise on an urgent basis.

Therefore, rationalisation of colony categorization is critical to bring some harmony between circle and transaction prices. Mismatch ranges from 10-50% on either side. Colonies like Maharani Bagh and New Friends colony have transaction prices which are lower than circle rates to the extent of 30-50%. On the other hand, prices in places like Greater Kailash, Defence Colony are almost double of the current circle rate.

RECOMMENDATIONS TO BRING TRANSPARENCY AND ACCOUNTABILITY

IN DELHI’S REAL ESTATE

  • ➢ The government should consider reigning in General Power of Attorney or GPA registrations unless related by blood. Blanket banning of GPA registrations may not be feasible as they could hamper Non- Resident Indian or NRI sellers, who do execute their sales through GPAs. Keep-ing that in mind, we recommend that only registered and apostilled POAs should be considered for sale and registration. o There is an urgent need to amend the RERA Act, to include 200 square meter or 4 floor development. Experts opine, almost 90% of Delhi’s residential market would be covered with this one crucial amendment. RERA registration should be made mandatory for all residential developments in Category A colonies, irre-spective of size, number of units or any other exclusion that the builder might use.
    • Under provision to Section 3(2) the State Government does have the power to reduce these thresholds and cover projects less than 500 square meters or 8 apartments. Thus, State Government should consider notifying lesser thresholds and cover more projects under RERA.
    • A RERA registration number should be made a prerequisite for approving building sanction plans, completion certificate, and registration of sale deed.
    • Recognition of compliant builders and agents on RERA website will increase aware-ness and benefit home buyers in choosing the right people. Delhi RERA could facilitate or bring to prominence such projects.
    • Agent name and RERA registration number should be mandatory in all property trans-actions involving an agent. Ideally every sale document should have agent details and its RERA registration number, to ensure proper implementation.
    • Delhi RERA is planning a campaign to drive higher awareness of RERA amongst home buyers, and we welcome it. Making home buyers aware of the risks of buying a non RERA registered project or from a non RERA registered broker, will go a long way in cleaning up the market. We recommend the Delhi Government to consider a 0.25% discount on stamp duty for RERA registered projects. This single step will immediately boost awareness and incentivize home buyers to opt for RERA registered projects, forc-ing builders to register.
    • One of the key changes implemented by RERA is the imposition of an escrow for all RERA registered projects. It compels developers to transfer 70% of the money received from customers be kept in an escrow account maintained with a scheduled commercial bank. This particular provision prevents developers from siphoning off funds, using funds for other developments or buying fresh land. This one clause mitigates the risk of insolvency. It is critical for Delhi RERA to monitor that this rule of an escrow ac-count is followed rigorously.
    • We also recommend that various agreements such as Agreement to Sale and sale deeds, are standardized. While RERA Act stipulates that, the practice is not being followed. Delhi RERA website does have a model agreement for sale, which is rarely followed by builders.

➢ Rationalization of circle rates across different categories is another impending matter. The Delhi government has already started the process for revising the circle rates of properties, seeking feedback from the public. A committee of senior officials of the Revenue department is evaluating the circle rates of different kinds of landed properties and is to submit its report to the government. The circle rates in Delhi were last increased in 2014 and are currently out of sync with market realities. We recommend that the department looks at creating subcategories within the A-H categories, where needed. Given that Category A circle rates are over 3 times of category B, places like Lutyens, Westend and Shanti Niketan should be called A+ at current rates of A and places like Vasant Vihar, Panchsheel Park should move to A at 4.0 lacs per sq yds to reflect the ground realities.

➢ We also propose an alternate solution in the long term, for reducing the dependency on circle rates. We recommend that all property transaction values be published online on the revenue departments website. A simple search on any pin code, should immediately throw up the last 10 transactions, giving people a clear picture of what the market demand supply dynamics are. More importantly, such transparency measures will amplify the outliers, making it difficult to register any property at prices lower than transaction price

➢ It is time that all home ownership records are digitized and made available to every citizen of Delhi to cross check the title of a property and safeguard himself or herself. Delhi Government has made huge progress on taking the most important services for Delhiites, online through various measures. It must now move in the direction of online digital records of home and land ownership.

FINAL WORD

Extremely low number of project registrations under DELHI RERA should be a cause of concern to all authorities/stakeholders. A sector can only flourish when the consumer or the customer feels safe. A home is one of the biggest purchases and financial commitment for most Indians. Non-RERA registra-tion allows builders to escape any scrutiny and has led to significantly higher numbers of delayed projects, disputes, and property litigations. One sided agreement to sell by developers are rampant, and put the customer at a very high risk.

We believe, if the above recommendations are implemented at the earliest, especially a State Govern-ment notification to cover projects with lesser threshold than 500 square meter or 8 apartments, within the ambit of RERA, Delhi’s real estate market will benefit hugely, protecting buyers from fly by night operators and builders without adequate financial muscle or experience to execute projects.